Mergers & Acquisitions: Valuation

“Price is what you pay. Value is what you get.” ~ Warren Buffett

LAST post, I highlighted the importance of strategy when considering the viability of a potential acquisition; however, before a final decision can be made, a consultant needs to estimate the value of the target company.

Building on information provided in Management Consulting: A Guide to the Profession, I highlight three approaches that a consultant can use when performing a valuation:

  1. Balance sheet valuation;
  2. Market based valuation; and
  3. Valuation of discounted expected future cash flows.

Target Valuation v4

Each valuation method will result in a different estimate, and the method you select will depend on the situation.

If you are working for the target company, then the obvious goal is to choose the method that yields the highest possible valuation for the company.

However, if you are working for the acquiring company, then the valuation method you select depends on the objective for the merger. If the goal is diversification, then calculating the present value of future cash flows would be appropriate (DCF valuation). If on the other hand the company is being acquired for its resources and capabilities, then valuation should be based on either the market value or replacement value of assets. The replacement value is simply an estimate of how much it would cost to build similar resources and capabilities from scratch.

In addition to valuing the target company, you also need to estimate the value of potential synergies.  Revenue synergies and cost synergies are the revenue streams and cost savings that would be available to a combined entity but not to the target or acquiring company acting by itself.

During a case interview, it is important to thoroughly explain your reasons for using a particular valuation method as well as describe the appropriate process for implementation.

What Adversity Can Teach You About Branding

When adversity strikes, branding gives you resilience

This guest post is by Ryan Currie. Ryan is a product manager at with 5 years experience in online marketing and product development. He is on the cutting edge of developments in emerging technologies and open source projects.

IN BUSINESS, branding is crucially important. If your business doesn’t have a brand, then you may as well be invisible.

Creating a brand is akin to designing a personality. Multi-national corporations can have a brand, as can a sole proprietor. The best thing about branding isn’t the notoriety, the creativity, or even the customers you gain from crafting a really terrific brand. In actuality, the best thing about a brand is the resilience it provides.

Adversity hits every company and every professional at some point. Just think of Apple’s struggle for survival in the 1990s. The question isn’t whether you’re going to face adversity or even when it’s going to occur. The real question is what you’re going to do when adversity strikes.

Consider the case of Kentucky Fried Chicken. A smash hit throughout the 70s and 80s, selling chicken literally by the bucketful. But when public attitudes shifted around 2000, Kentucky Fried started a rebranding process and is now known simply as “KFC”.

What Adversity Can Teach Us About Branding 2What’s interesting about the KFC case isn’t just the name change, but the evolution of the brand over the course of the last decade or so. When healthier attitudes struck, KFC did what most brands would do and tried to adapt. They initially offered grilled chicken breasts and an increased number of vegetable sides, pandering to a diet-savvy audience. Their efforts bombed.

What Adversity Can Teach Us About Branding 3KFC then decided to embrace their identity and become one of the only brands on the market to offer the opposite of health – enter the KFC Double Down, a fried chicken, cheese, and bacon monstrosity of a sandwich.

KFC is hardly the only company to take adversity by the horns and figure out a way to adjust its position in the market. Other companies have done so including Apple, J.C. Penny, Lego, and even Microsoft.

Every brand is malleable – that’s important to remember – but in adjusting a brand’s position it may not always be wise to pander to the newest customer trends. Brands that look outside the box (read: 20 Piece Bucket) and find intelligent ways to evolve their unique brand position tend to be more successful.

Adversity comes to all of us. Whether you’re a business owner, a job seeker, or an entrepreneur, branding should be at the forefront of your marketing efforts. Don’t be afraid of challenges to your brand…embrace them! You may find yourself a niche you never dreamed of, and that can make all the difference.

World Collapse Explained in 3 Minutes

Bailouts: a band-aid solution for continuing sovereign debt crises

BAILOUTS were the band-aid solution prescribed for the Greek sovereign debt crisis. And every indication suggests that Greece will require another band-aid early next year.

In this context, Clarke and Dawe raise an interesting and often carefully overlooked question. Where does the money come from to bail out basket case economies? Countries whose finances are in such a state of disarray that they were not only unable be repay their original debts but will almost certainly be unable to repay the subsequent bail out money.

In the case of Greece, the money has come from the EU, the European Central Bank and the IMF, which is all well and good. Saving Greece is possible since it is only the 13th largest economy in the European Union.

Compare this with Italy which is the 3rd largest economy in the Eurozone, and has public debts of around 125% of GDP (second only to Greece). Standing at around $2.5 trillion, Italy’s gross external debt is simply too big to bail out. If Italy should default on its debts, as well it might, then this could spell the end of the Eurozone.

Looking slightly further afield, we see the USA (~$17 trillion of public debt) and Japan (~$14 trillion of public debt). These two countries continue to run large fiscal deficits, to rely on foreign creditors (who for the moment seem happy to continue fueling government excess), and are also the largest donors to the IMF. For these two countries, there are no lenders of last resort.

Both countries appear to be aware of their precarious position, and have engaged in a number of rounds of Quantitative Easing (read: printing money). QE is a remedy of last resort which aims to create price inflation and thereby reduce the real value of government debt. Printing money is often associated with hyper-inflation and is the kind of solution you would expect from leaders like Robert Mugabe (hyperinflation in Zimbabwe was estimated at 6.5 sextillion percent in November 2008).

Bailouts are only a band-aid solution for government excess. They don’t work in the long run, and they don’t work if the country is too big to bail out. We can only hope that Greece, the USA, Japan, and other countries decide to get their fiscal houses in order. Failure to do so may result in more loss of blood than can be remedied by a few band-aids.

Change is Constant

Change is a process

IN the industrial age, change was seen as an event which could be managed: launch a new product, introduce a new feature, enter a new market.

But this was never true.

As the Greek philosopher Heraclitus rightly pointed out: “Change is Constant”.

In the information age, change is now happening so quickly that we are forced to accept it for what it is: a constant process of experimentation, discovery, and progress.

Cisco Systems, a successful tech company, appreciates the need for change (even if this requires a tough decision to cut 4,000 jobs).

Are you initiating positive change in your life and your work?

Your peers and competitors are pushing onwards into the future, with or without you.

Flourishing in a Social Enterprise World

Flourishing in a Social Enterprise WorldTHE YEAR is 2050.

Imagine waking up in a world where you feel positive and motivated about going to work, knowing that your work provides value to customers in a way that is sustainable and responsible. Your employer operates with the express aim of benefiting members of the community and reinvests all profits to further its social aims.

This hypothetical future may seem a distant reality, yet many people today recognise a need for change: executive salaries of large corporations have become excessive, senior managers of listed companies worry about meeting analyst expectations rather than customer expectations, and global finance now focuses largely on speculation and market timing rather than funding productive investment.

Rise of Social Enterprise

Bright Future AheadThe growing trend towards social enterprise could be a game changer. A social enterprise, in essence, is an organisation which is not run primarily for profit and is required to reinvest any profits to further its social aims.

A world based on social enterprise may be closer than you think. Since the late 1990s, the social sector has been on the rise. In Canada, for example, these institutions now contribute 8% of the country’s GDP. And the pioneering work of social enterprises in sectors like construction, manufacturing, banking, hospitality and healthcare suggest that innovative and sustainable businesses are able to thrive without being run primarily for profit.

Social enterprise has the potential to change the status quo in three important ways:

  1. Firstly, social enterprises are allowed to make a profit, which means they have an incentive to innovate and operate efficiently.
  2. Secondly, social enterprises are required to reinvest any profits rather than pay dividends. This enables them to focus on long term sustainability and community benefit, and is an attractive model for charities since funding social projects out of profits makes them less dependent on grants and philanthropy. Take, for example, BRAC, one of the world’s largest social enterprises. Since 1972, BRAC has supported over 100 million people through social development services and almost 80% of its revenue comes from commercial enterprises, including a large-scale dairy and a retail chain of handicraft stores.
  3. Thirdly, social enterprises have the potential to out-compete equivalent ‘for-profit’ businesses in three ways:
    • Social enterprises often qualify for tax concessions and free support available solely these kinds of organisations;
    • Consumer preferences are increasingly supportive of ethical and sustainable business practices; and
    • Management are likely to be under less pressure to shrink a social enterprise during a downturn. This may allow social enterprises to make significant gains in market share during periods when ‘for profit’ organisations are making cut backs.

Who is leading the charge?

Our friends at The Post Growth Institute are currently writing a book called How on Earth?, which will look at how we can flourish in a Social Enterprise World by 2050.

We understand that this will be the world’s first book to explore the prospect of social enterprise becoming the central model of local, national and international business by 2050. It will also outline practical steps that people can take to fast-track an evolution towards a sustainable economy.

If you want an advanced preview of some of the book’s main ideas, please see the talk below by the book’s lead author, Dr Donnie Maclurcan, which was given at the Environmental Professionals Forum in 2012:

Your Success: Combating 3 Common Obstacles

Fear, Laziness, and Pessimism

YOU are capable of producing great work.

But are you?

It is possible that you merely producing the minimum required of you. You may even have a list of sensible sounding reasons why now is not the right time to take bold action to achieve success: you’re too old, you’re too young, you’re too tired, you’re having too much fun, you’re feeling depressed, you’re too inexperienced, the economy is down, your family needs you, [insert more sensible sounding reasons here].

It is possible that your “sensible sounding reasons” are merely excuses which help to hide fear, laziness, or hopeless pessimism. If you think this might be the case, then here are 3 thoughts to help you combat these obstacles:

  1. Fear: You may be concerned about how other people will respond to your efforts, and whether they will criticise you. To combat this fear, consider the words of Gandhi, “First they ignore you, then they laugh at you, then they fight you, and then you win.” If your actions do not meet with criticism, then you may still have a long way to go. Accept criticism as one likely step along your path to ultimate success.
  2. Laziness: What is your goal? If you don’t have a destination, then it will be pretty hard to get moving. Once you have a clear goal, take baby steps. Break it down into realistic and achievable chunks. Get moving, but don’t overstretch. A journey of a thousand miles begins with a single step.
  3. Pessimism: Pessimism is merely a habit of negative self talk. This bad habit can be broken, and the first step is to understand your self talk and how you can adopt a more positive style. A good place to start would be to read Seligman’s book on the subject called “Learned Optimism: How to Change Your Mind and Your Life“.